Urban property tax reform in Punjab

The Punjab Government is considering reforming its property tax valuation system and is analysing the impact of potentially shifting from the ARV-based system of property valuation to a capital value-based valuation system. Specifically, the government requires support in understanding the distributional and revenue consequences of this shift. Amongst the levers of tax policy that the government has access to, the method for property valuation remains understudied. Consequently, policymaking in this area is adversely affected by the lack of prior academic or policy research showing the impact of switching from one valuation system to another.

These concerns have prompted the Government of Punjab to examine the case for reforming the existing valuation method and moving away from an area-based annual rental value (ARV) system that focuses more on taxing improvements, to an area-based quasi-capital value (CV) system that taxes both land and improvements.

In this project, we will exploit the novel integrated urban property database for Lahore to examine the two valuation methods in terms of distributional fairness, revenue potential and buoyancy. We will simulate the distributional impact of shifting from the ARV system to a CV system that uses district collector (DC) rates as proxies for market values. The DC rates are based on property value surveys conducted by revenue officials and the land value declarations made by buyers at the time of purchase in the Government’s online e-stamping system.

We will estimate how the property tax burden changes for existing taxpayers that fall in different asset value bands under an area-based quasi-CV system under the assumption that the tax rate is set to generate the same tax collection demand under both systems. We will also simulate the effect this change has on property values if it were to be fully capitalised into market prices and analyse the distributional implication of this change.